[Federal Register Volume 75, Number 215 (Monday, November 8, 2010)]
[Proposed Rules]
[Pages 68560-68568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28136]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-63236; File No. S7-32-10]
RIN 3235-AK77
Prohibition Against Fraud, Manipulation, and Deception in
Connection With Security-Based Swaps
Agency: Securities and Exchange Commission.
Action: Proposed rule.
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Summary: The Securities and Exchange Commission (``Commission'') is
proposing for comment a new rule under the Securities Exchange Act of
1934 (``Exchange Act'') that is intended to prevent fraud,
manipulation, and deception in connection with the offer, purchase or
sale of any security-based swap, the exercise of any right or
performance of any obligation under a security-based swap, or the
avoidance of such exercise or performance.
DATES: Comments should be received on or before December 23, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
[[Page 68561]]
Send an e-mail to [email protected]. Please include
File Number S7-32-10 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549.
All submissions should refer to File Number S7-32-10. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Josephine Tao, Assistant Director,
Elizabeth Sandoe, Senior Special Counsel, or Joan Collopy, Special
Counsel, Office of Trading Practices and Processing, Division of
Trading and Markets, at (202) 551-5720, at the Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is requesting public comment
on proposed Rule 9j-1 under the Exchange Act.
I. Introduction
The Commission is proposing Exchange Act Rule 9j-1, which is
intended to prohibit fraud, manipulation, and deception in connection
with the offer, purchase or sale of any security-based swap, as well as
in connection with the exercise of any right or performance of any
obligation under a security-based swap, including the avoidance of such
exercise or performance. Section 761(a) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the ``Dodd-Frank Act'') \1\ adds
new Section 3(a)(68) of the Exchange Act to define a ``security-based
swap'' as any agreement, contract, or transaction that is a swap, as
defined in Section 1(a) of the Commodity Exchange Act,\2\ that is based
on a narrow-based security index, or a single security or loan, or any
interest therein or on the value thereof, or the occurrence or non-
occurrence of an event relating to a single issuer of a security or the
issuers of securities in a narrow-based security index, provided that
such event directly affects the financial statements, financial
condition, or financial obligations of the issuer.\3\
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\1\ Public Law 111-203 (July 21, 2010).
\2\ 7 U.S.C. 1a. Section 721(b) of the Dodd-Frank Act amends
Section 1(a) of the Commodity Exchange Act to add paragraph (47)
defining swap, subject to enumerated exceptions, as ``any agreement,
contract, or transaction: (i) That is a put, call, cap, floor,
collar, or similar option of any kind that is for the purchase or
sale, or based on the value, of 1 or more interest or other rates,
currencies, commodities, securities, instruments of indebtedness,
indices, quantitative measures, or other financial or economic
interests or property of any kind; (ii) that provides for any
purchase, sale, payment, or delivery (other than a dividend on an
equity security) that is dependent on the occurrence, nonoccurrence,
or the extent of the occurrence of an event or contingency
associated with a potential financial, economic, or commercial
consequence; (iii) that provides on an executory basis for the
exchange, on a fixed or contingent basis, of 1 or more payments
based on the value or level of 1 or more interest or other rates,
currencies, commodities, securities, instruments of indebtedness,
indices, quantitative measures, or other financial or economic
interests or property of any kind, or any interest therein or based
on the value thereof, and that transfers, as between the parties to
the transaction, in whole or in part, the financial risk associated
with a future change in any such value or level * * * including any
agreement, contract, or transaction commonly known as (I) an
interest rate swap; (II) a rate floor; (III) a rate cap; (IV) a rate
collar; (V) a cross-currency rate swap; (VI) a basis swap; (VII) a
currency swap; (VIII) a foreign exchange swap; (IX) a total return
swap; (X) an equity index swap; (XI) an equity swap; (XII) a debt
index swap; (XIII) a debt swap; (XIV) a credit spread; (XV) a credit
default swap; (XVI) a credit swap; * * * (iv) that is an agreement,
contract, or transaction that is, or in the future becomes commonly
known to the trade as a swap * * * or (vi) that is any combination
or permutation of, or option on, any agreement, contract, or
transaction described in any of clauses (i) through (v).''
\3\ See Section 761(a)(6) of the Dodd-Frank Act. See also 15
U.S.C. 78c(a)(68).
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Security-based swaps, as securities,\4\ will be subject to the
general antifraud and anti-manipulation provisions of the federal
securities laws (e.g., Section 10(b) of the Exchange Act and Rule 10b-5
thereunder, and Section 17(a) of the Securities Act of 1933
(``Securities Act'')) \5\ once the relevant provisions of the Dodd-
Frank Act take effect.\6\ Most security-based swaps are characterized
by ongoing payments or deliveries between the parties throughout the
life of the security-based swap pursuant to their rights and
obligations. Because such payments or deliveries occur after the
purchase of a security-based swap but before the sale or termination of
the security-based swap,\7\ we believe a rule making explicit the
liability of persons that engage in misconduct to trigger, avoid, or
affect the value of such ongoing payments or deliveries is a measured
and reasonable means to prevent fraud, manipulation, and deception in
connection with security-based swaps.
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\4\ See Section 761(a)(2) of the Dodd-Frank Act, which amends
the definition of ``security'' in Section 3(a)(10) of the Exchange
Act to include security-based swaps. See also Section 768(a)(1) of
the Dodd-Frank Act, which amends the definition of ``security'' in
Section 2(a)(1) of the Securities Act to include security-based
swaps.
\5\ Exchange Act Section 10(b) provides that ``[i]t shall be
unlawful for any person, directly or indirectly * * * (b) to use or
employ, in connection with the purchase or sale of any security * *
* any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for
the protection of investors.'' 15 U.S.C. 78j.
Rule 10b-5 under the Exchange Act provides that ``[i]t shall be
unlawful for any person, directly or indirectly * * * (a) to employ
any device, scheme, or artifice to defraud, (b) to make any untrue
statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which they are made, not misleading, or (c) to
engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person, in connection
with the purchase or sale of any security.'' 17 CFR 240.10b-5.
Securities Act Section 17(a) provides that ``[i]t shall be
unlawful for any person in the offer or sale of securities * * *
directly or indirectly--(1) to employ any device, scheme, or
artifice to defraud, or (2) to obtain money or property by means of
any untrue statement of a material fact or any omission to state a
material fact necessary in order to make the statements made, in
light of the circumstances under which they are made, not
misleading, or (3) to engage in any transaction, practice, or course
of business which operates or would operate as a fraud or deceit
upon the purchaser.'' 15 U.S.C. 77q(a).
\6\ See Section 774 of the Dodd-Frank Act. Security-based swap
agreements, as defined in Section 206B of the Gramm-Leach-Bliley
Act, 15 U.S.C. 78c note, are currently subject to the general
antifraud and anti-manipulation provisions of the federal securities
laws (e.g., Section 10(b) of the Exchange Act and Rule 10b-5
thereunder).
\7\ The Dodd-Frank Act amended the definitions of ``purchase''
or ``sale'' in the Securities Act and Exchange Act to include, in
the context of security-based swaps, execution, termination,
assignment, exchange, transfer, or extinguishment of rights. See
Sections 761(a)(3) and (a)(4) of the Dodd-Frank Act (amending
Sections 3(a)(13) and (a)(14) of the Exchange Act). See also Section
768(a)(3) of the Dodd-Frank Act (amending Section 2(a)(18) of the
Securities Act). Therefore, misconduct in connection with these
actions will also be prohibited under Exchange Act Section 10(b) and
Rule 10b-5 thereunder, and Securities Act Section 17(a).
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Proposed Rule 9j-1 would prohibit the same misconduct as Exchange
Act Section 10(b) and Rule 10b-5 thereunder, and Securities Act Section
17(a), but would also explicitly reach misconduct that is in connection
with the ``exercise of any right or performance of any obligation
under'' a security-based swap. In other words, proposed Rule 9j-1 would
apply to offers,
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purchases and sales of security-based swaps in the same way that the
general antifraud provisions apply to all securities but would also
explicitly apply to the cash flows, payments, deliveries, and other
ongoing obligations and rights that are specific to security-based
swaps.
II. Background
On July 21, 2010, the President signed into law the Dodd-Frank Act.
Title VII of the Dodd-Frank Act, referred to as the Wall Street
Transparency and Accountability Act of 2010, establishes a regulatory
framework for the regulation of over-the-counter (``OTC'') swaps
market. Under this framework, in general, swaps are regulated primarily
by the Commodity Futures Trading Commission (``CFTC''), and security-
based swaps are regulated primarily by the Commission.
Section 763(g) of the Dodd-Frank Act expands the anti-manipulation
provisions of Section 9 of the Exchange Act \8\ and authorizes the
Commission to adopt rules to prevent fraud, manipulation, and deception
in connection with security-based swaps. Specifically, Section 763(g)
adds new subparagraph (j) to Section 9 to make it unlawful for ``any
person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce or of the mails, or of any
facility of any national securities exchange, to effect any transaction
in, or to induce or attempt to induce the purchase or sale of, any
security-based swap, in connection with which such person engages in
any fraudulent, deceptive, or manipulative act or practice, makes any
fictitious quotation, or engages in any transaction, practice, or
course of business which operates as a fraud or deceit upon any
person.'' \9\
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\8\ See Exchange Act Section 9, 15 U.S.C. 78i.
\9\ See Exchange Act Section 9(j), 15 U.S.C. 78i(j).
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Because Exchange Act Section 9(j) applies to ``any person,'' \10\
it would encompass issuers, broker-dealers, security-based swap
dealers,\11\ major security-based swap participants,\12\ persons
associated with a security-based swap dealer or major security-based
swap participant, security-based swap counterparties, and any
customers, clients or other persons that use or employ or effect
transactions in security-based swaps, including security-based swaps to
hedge or mitigate commercial risk or exposure.\13\ Section 763(g) does
not include any specific exceptions. In addition, Exchange Act Section
9(j) directs the Commission to ``by rules and regulations define, and
prescribe means reasonably designed to prevent, such transactions,
acts, practices, and courses of business as are fraudulent, deceptive,
or manipulative, and such quotations as are fictitious.'' \14\
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\10\ Exchange Act Section 3(a)(9) defines ``person'' as ``a
natural person, company, government or, political subdivision,
agency, or instrumentality of a government.'' 15 U.S.C. 78c(a)(9).
\11\ Section 761 of the Dodd-Frank Act adds new definitions to
Exchange Act Section 3(a). Subject to certain exceptions, Exchange
Act Section 3(a)(71)(A) defines ``security-based swap dealer'' to
mean any person who: (i) Holds themself out as a dealer in security-
based swaps; (ii) makes a market in security-based swaps; (iii)
regularly enters into security-based swaps with counterparties as an
ordinary course of business for its own account; or (iv) engages in
any activity causing it to be commonly known in the trade as a
dealer or market maker in security-based swaps. 15 U.S.C.
78c(a)(71)(A).
\12\ ``Major security-based swap participant'' is defined in
Section 3(a)(67)(A) of the Exchange Act as any person: (i) Who is
not a security-based swap dealer; and (ii)(I) who maintains a
substantial position in security-based swaps for any of the major
security-based swap categories, as such categories are determined by
the Commission, excluding both positions held for hedging or
mitigating commercial risk and positions maintained by any employee
benefit plan (or any contract held by such a plan) as defined in
paragraphs (3) and (32) of Section 3 of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1002) for the primary purpose
of hedging or mitigating any risk directly associated with the
operation of the plan; (II) whose outstanding security-based swaps
create substantial counterparty exposure that could have serious
adverse effects on the financial stability of the United States
banking system or financial markets; or (III) that is a financial
entity that (aa) is highly leveraged relative to the amount of
capital such entity holds and that is not subject to capital
requirements established by an appropriate Federal banking
regulator; and (bb) maintains a substantial position in outstanding
security-based swaps in any major security-based swap category, as
such categories are determined by the Commission. 15 U.S.C.
78c(a)(67)(A).
The terms ``security-based swap dealer,'' ``major security-based
swap participant,'' as well as ``security-based swap,'' and other
terms will be the subject of joint rulemaking by the Commission and
the CFTC. The Commission has issued an advance notice of proposed
rulemaking seeking comment on the definitions of key terms relating
to the regulation of swaps and security-based swaps. See Securities
Exchange Act Release No. 62717 (Aug. 13, 2010), 75 FR 51429 (Aug.
20, 2010).
\13\ In other words, in contrast to certain other provisions of
Title VII of the Dodd-Frank Act, Section 763(g) does not make an
exception for end-users.
\14\ See supra note 9.
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III. Proposed Rule 9j-1
As noted above, unlike many other securities, a key characteristic
of most security-based swaps is the obligation for and rights to
ongoing payments or deliveries between the parties throughout the life
of the security-based swap pursuant to the rights and obligations under
the security-based swap. For example, a total return swap (``TRS'')
that is a security-based swap may obligate one of the parties (i.e.,
the total return payer) to transfer the total economic performance
(e.g., income from interest and fees, gains or losses from market
movements, and credit losses) of a reference asset (e.g., a debt
security) (the ``reference underlying''),\15\ in exchange for a
specified or fixed or floating cash flow (including payments for any
principal losses on the reference asset) from the other party (i.e.,
the total return receiver). This stream of payments, deliveries, or
other ongoing obligations or rights between parties to a security-based
swap can pose significant risk if, for example, the reference
underlying of such security-based swap declines in value or the
economic condition of the issuer changes (e.g., defaults or goes into
bankruptcy).
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\15\ As used in this release, the term ``reference underlying''
of a security-based swap would include any reference asset
underlying a security-based swap, including any security underlying
a security-based swap, any deliverable obligation under the terms of
a security-based swap, any reference obligation, or reference entity
under a security-based swap. This could include, for example,
securities, instruments of indebtedness, indices, interest rates,
quantitative measures, or other financial or economic interests
underlying a security-based swap.
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The exercise of rights or performance of obligations under a
security-based swap can present opportunities and incentives for
fraudulent, deceptive, or manipulative conduct. Parties to a security-
based swap may engage in misconduct in connection with the security-
based swap (including in the reference underlying of such security-
based swap) \16\ to trigger, avoid, or affect the value of such ongoing
payments or deliveries. For instance, a party faced with significant
risk exposure may attempt to engage in manipulative or deceptive
conduct that increases or decreases the value of payments or cash flow
under a security-based swap relative to the value of the reference
underlying, including the price or value of a deliverable obligation
under a security-based swap. However, because such payments (and the
avoidance of such payments) occur after the purchase of a security-
based swap but before the sale or termination of the security-based
swap, we believe a rule making explicit the illegality of misconduct in
connection with such payments is appropriate.
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\16\ See id.
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Proposed Rule 9j-1 therefore prohibits the same categories of
misconduct as Exchange Act Section 10(b) and Rule 10b-5 thereunder, and
Securities Act Section 17(a) \17\ in the context of security-based
swaps, and
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explicitly reaches misconduct in connection with these ongoing payments
or deliveries. In particular, proposed Rule 9j-1 would specify that it
is unlawful for any person, directly or indirectly, in connection with
the offer, purchase or sale of any security-based swap, the exercise of
any right or performance of any obligation under a security-based swap,
or the avoidance of such exercise or performance: (a) To employ any
device, scheme, or artifice to defraud or manipulate; (b) to knowingly
or recklessly make any untrue statement of a material fact, or to
knowingly or recklessly omit to state a material fact necessary in
order to make the statements made, in the light of the circumstances
under which they were made, not misleading; (c) to obtain money or
property by means of any untrue statement of a material fact or any
omission to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they were
made, not misleading; or (d) to engage in any act, practice, or course
of business which operates or would operate as a fraud or deceit upon
any person.\18\
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\17\ See supra note 5.
\18\ Proposed Rule 9j-1.
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The language in paragraph (a) of the proposed rule, which is based
on Rule 10b-5(a), differs from Rule 10b-5(a) in that it explicitly
prohibits employing any device, scheme or artifice to defraud or
manipulate. While the term ``manipulate'' does not appear in the text
of Rule 10b-5, Rule 10b-5 has been interpreted to reach manipulative
activities. In light of that interpretation, we have added language to
clarify that manipulation in connection with security-based swaps is
unlawful. We do not anticipate or intend this clarification to
represent a departure from the past interpretation or scope of Rule
10b-5(a). In addition, the language in paragraph (b) of the proposed
rule, which is based on Rule 10b-5(b), differs from Rule 10b-5(b) in
that it explicitly prohibits knowingly or recklessly making any untrue
statement of a material fact, or knowingly or recklessly omitting to
state a material fact necessary in order to make the statements made,
in light of the circumstances under which they were made, not
misleading. This is intended to make clear, consistent with Rule 10b-5
case law, that paragraph (b), in contrast to paragraph (c), would
require scienter. We do not anticipate or intend this clarification to
represent a departure from the past interpretation or scope of Rule
10b-5(b).
The proposed rule would prohibit a person from engaging in
fraudulent and deceptive schemes in order to increase or decrease the
price or value of a security-based swap, or disseminating false or
misleading statements that affect or otherwise manipulate the price or
value of the reference underlying of a security-based swap for the
purpose of benefiting such person's position in the security-based
swap. The proposed rule would also prevent, for example, disseminating
false financial information or data in connection with the sale of a
security-based swap or insider trading in a security-based swap.\19\
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\19\ See also supra note 5.
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In addition, the proposed rule would explicitly prohibit misconduct
that is in connection with the ``exercise of any right or performance
of any obligation under'' a security-based swap. This would include,
for example, misconduct that affects the market value of the security-
based swap for purposes of posting collateral or making payments or
deliveries under such security-based swap. Thus, the proposed rule
would, among other things, prohibit fraudulent conduct (e.g., knowingly
or recklessly making a false or misleading statement) in connection
with a security-based swap that affects the value of such cash flow,
payments, or deliveries, such as by triggering the obligation of a
counterparty to make a large payment or to post additional collateral.
It would also prohibit a person from taking fraudulent or manipulative
action with respect to the reference underlying of the security-based
swap that triggers the exercise of a right or performance of an
obligation or affects the payments to be made.
The proposed rule also would explicitly prohibit misconduct that
avoids the exercise of rights or the performance of obligations under
the security-based swap. Thus, it would prohibit a person from making
false or misleading statements in order to avoid having to make a large
payment, post additional collateral, or perform another obligation
under the security-based swap. It would also prohibit a person from
taking fraudulent or manipulative action with respect to the reference
underlying of the security-based swap that avoids triggering the
exercise of a right or performance of an obligation or affects the
payments to be made.
Paragraphs (a) and (b) of proposed Rule 9j-1 are modeled after
Exchange Act Section 10(b) and Rule 10b-5,\20\ and Securities Act
Section 17(a)(1),\21\ and therefore would require scienter. In
contrast, paragraphs (c) and (d) of the proposed rule would not require
scienter like Sections 17(a)(2) and (a)(3) of the Securities Act \22\
and Section 206(2) of the Investment Advisers Act of 1940 (``Advisers
Act'').\23\ These paragraphs are proposed to prevent conduct that
operates as a fraud, manipulation, or deception.
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\20\ To state a claim under Exchange Act Section 10(b) and Rule
10b-5, the Commission must establish that the misstatements or
omissions were made with scienter. See, e.g., Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 (1976). The Supreme Court has defined
scienter as ``a mental state embracing intent to deceive, manipulate
or defraud.'' Id. Recklessness will generally satisfy the scienter
requirement. See, e.g., Greebel v. FTP Software, Inc., 194 F.3d 185,
198 (1st Cir. 1999); SEC v. Environmental, Inc., 155 F.3d 107, 111
(2d Cir. 1998).
\21\ Establishing violations of Securities Act Section 17(a)(1)
requires a showing of scienter. See, e.g., Aaron v. SEC, 446 U.S.
680, 701-02 (1980). Scienter is the ``mental state embracing intent
to deceive, manipulate or defraud.'' Ernst & Ernst v. Hochfelder,
425 U.S. 185, 193 (1976). The Fifth Circuit Court of Appeals has
held that scienter is established by a showing that the defendants
acted intentionally or with severe recklessness. See Broad v.
Rockwell International Corp., 642 F.2d 929 (5th Cir.) (en banc),
cert. denied, 454 U.S. 965 (1981).
\22\ Actions pursuant to Securities Act Sections 17(a)(2) and
17(a)(3) do not require a showing of scienter. See, e.g., Aaron, 446
U.S. at 701-02. In Aaron, the Supreme Court sought to determine
whether scienter was required in a Commission injunctive proceeding
pursuant to the antifraud provisions of Exchange Act Section 10(b)
and Securities Act Section 17(a). The Court examined the language of
both sections and determined that scienter was required under
Section 10(b) because the words ``manipulative,'' ``device,'' and
``contrivance,'' which are used in the statute, evidenced a
Congressional intent to proscribe only knowing or intentional
misconduct. Similarly, the Court concluded that subsection (1) of
Section 17(a) required proof of scienter because Congress used such
words as ``device,'' ``scheme,'' and ``artifice to defraud.'' Aaron,
446 U.S. at 696. In contrast, the Court concluded that the absence
of such words under subsections (2) and (3) of Section 17(a)
demonstrated that no scienter was required. Section 17(a)(2)
prohibits any person from obtaining money or property ``by means of
any untrue statement of a material fact or omission to state a
material fact,'' which the Court found to be ``devoid of any
suggestion whatsoever of a scienter requirement.'' Aaron, 446 U.S.
at 696. Similarly, the Court found, in construing Section 17(a)(3),
under which it is unlawful for any person ``to engage in any
transaction, practice, or course of business which operates or would
operate as a fraud or deceit,'' that scienter was not required
because it ``quite plainly focuses upon the effect of particular
conduct on members of the investing public, rather than upon the
culpability of the person responsible.'' Aaron, 446 U.S. at 697.
\23\ See, e.g., Section 206(2) of the Advisers Act, which
prohibits an investment adviser from engaging in ``any transaction,
practice or course of business which operates as a fraud or deceit
upon any client or prospective client.'' The Commission is not
required to demonstrate that an adviser acted with scienter in order
to prove a Section 206(2) violation. SEC v. Steadman, 967 F.2d 636,
643 (D.C. Cir. 1992) (citing SEC v. Capital Gains Research Bureau,
Inc., 375 U.S. 180, 191-92 (1963)).
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While both paragraphs (b) and (c) of the proposed rule would
prohibit
[[Page 68564]]
material misstatements and omissions,\24\ they would address different
levels of culpability. Paragraph (b) would apply when there is evidence
of scienter (e.g., when a party to a security-based swap knowingly or
recklessly makes a false statement even though it may not receive any
money or property as a result). In contrast, paragraph (c) would extend
to conduct that is at least negligent (e.g., when a party to a
security-based swap knows or reasonably should know that a statement
was false or misleading and directly or indirectly obtains money or
property from such statement).
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\24\ Consistent with Exchange Act Section 10(b), such
misstatements and omissions must be material to be actionable. See,
e.g., Basic v. Levinson, 485 U.S. 224, 233 (1988). Statements and
omissions are material if there is a substantial likelihood that a
reasonable investor would consider the information important in
making an investment decision. See id. at 231-32; TSC Indus., Inc.
v. Northway, Inc., 426 U.S. 438, 449 (1976).
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Because the proposed rule would apply to conduct ``in connection
with * * * a security-based swap'' it would apply to fraud,
manipulation, or deception involving the reference underlying \25\ of
such security-based swap to the extent that such misconduct is in
connection with the offer, purchase or sale of any security-based swap,
the exercise of any right or performance of any obligation under a
security-based swap, or the avoidance of such exercise or performance
(e.g., manipulative activity in the reference underlying that affects
the price of the security-based swap, including misconduct in the
reference underlying of a security-based swap that triggers, avoids, or
affects the value of ongoing payments or other delivery obligations
under such security-based swap).\26\ Depending on the facts and
circumstances, misconduct involving a security that is also a reference
underlying of any security-based swap may not necessarily be ``in
connection with'' the offer, purchase or sale of any security-based
swap, the exercise of any right or performance of any obligation under
a security-based swap, or the avoidance of such exercise or
performance, and therefore a violation of Rule 9j-1. The Commission, in
determining whether to bring an enforcement action under Rule 9j-1 for
misconduct involving such a security, would consider the facts and
circumstances associated with the misconduct, including, among other
things, the extent to which the effect of the misconduct on one or more
security-based swaps is foreseeable to the party engaging in the
misconduct or the purpose or the interest of that party.
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\25\ See supra note 15 (defining ``reference underlying'' of a
security-based swap to include, for example, any reference asset,
reference security, reference entity, or reference obligation
underlying a security-based swap).
\26\ See Superintendent of Insurance v. Bankers Life and
Casualty Co., 404 U.S. 6, 12-13 (1971) (to satisfy the ``in
connection with'' requirement, the fraud need only ``touch'' on the
purchase or sale of a security). See also SEC v. Texas Gulf Sulphur
Co., 401 F.2d 833, 860 (2d Cir. 1968) (en banc) (concluding that
``Congress when it used the phrase ``in connection with the purchase
or sale of any security'' intended only that the device employed,
whatever it might be, be of a sort that would cause reasonable
investors to rely thereon, and, in connection therewith, so relying,
cause them to purchase or sell a corporation's securities'').
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Consistent with Section 9(j) of the Exchange Act, the proposed rule
would apply to ``any person.'' \27\ In addition, the proposed rule
would also apply to misconduct ``directly or indirectly'' engaged in by
such person (i.e., whether the person engages in the misconduct alone
or through others).\28\
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\27\ See text supra at notes 10-13.
\28\ The terms ``directly and indirectly'' are intended to
describe the level of involvement necessary to establish liability
under the proposed rule. See also id.
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The Commission preliminarily believes that Proposed Rule 9j-1 is
reasonably designed to prevent fraud and manipulation in transactions
in security-based swaps and inducements to purchase or sell security-
based swaps. Because fraud and manipulation that affect the value of
the payments or deliveries pursuant to a security-based swap are likely
to distort the price and market for such security-based swaps, they can
undermine investor confidence in the integrity of the market for
security-based swaps, as well as the market for the reference
underlying of such security-based swap. The proposed rule is intended
to parallel the general antifraud provisions applicable to all
securities, while also explicitly addressing the characteristics of
cash flows, payments, deliveries, and other obligations and rights that
are specific to security-based swaps. By targeting misconduct that is
specific to the ways in which security-based swaps are structured and
used, the proposed rule should help to prevent such fraudulent and
manipulative conduct--without interfering with or otherwise unduly
inhibiting legitimate market or business activity.
While the proposed rule is modeled on existing securities laws
prohibiting fraud, manipulation, and deception in connection with
security-based swaps, it is not intended to limit or extend liability
in connection with non-swap securities to ``rights or obligations''
that do not involve purchases or sales. In other words, the scope of
the proposed rule is not intended to affect the application or
interpretation of the other antifraud provisions under the federal
securities laws.
Finally, as noted above, the Dodd-Frank Act included security-based
swaps in the definition of ``security'' under the Securities Act and
the Exchange Act.\29\ Thus, once the relevant provisions of the Dodd-
Frank Act take effect,\30\ persons effecting transactions in, or
engaged in acts, practices, and courses of business involving security-
based swaps will be subject to the Commission's rules and regulations
that define and proscribe acts and practices involving securities that
are deemed manipulative, deceptive, fraudulent, or otherwise unlawful
for purposes of the general antifraud and anti-manipulation provisions
of the federal securities laws, including Exchange Act Section 10(b),
Rule 10b-5 (and the prohibitions against insider trading), and
Securities Act Section 17(a).\31\
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\29\ See supra note 4 (defining ``security'' under the
Securities Act and Exchange Act to include ``security-based
swaps'').
\30\ See supra note 6.
\31\ See, e.g., Exchange Act Rules 10b-1 through 10b-21; 17 CFR
240.10-1 through 240.10b-21.
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IV. Request for Comment
The Commission seeks comment generally on all aspects of proposed
Rule 9j-1. We encourage commenters to present data on our proposals and
any suggested alternative approaches.
In addition, we seek specific comment on the following:
Does the reference in the proposed rule to ``in connection with the
offer, purchase or sale of a security-based swap, the exercise of any
right or performance of any obligation under a security-based swap, or
the avoidance of such exercise or performance'' address the full scope
of potentially fraudulent, manipulative, or deceptive conduct that
pertains to security-based swaps? If not, how should the scope of these
provisions be modified? Are there types of conduct not otherwise
discussed above that should be addressed by the proposed rule?
Commenters are invited to provide specific examples of such conduct.
Please discuss how and to what extent the proposed rule may affect
issuers, broker-dealers, security-based swap dealers, major security-
based swap participants, and other swap market participants. Are there
other alternatives or additional, or different, approaches that the
Commission should consider as means reasonably designed to prevent
``such transactions, acts, practices, and courses of business as are
fraudulent, deceptive, or manipulative''? In addition, are there
specific practices that the Commission should explicitly
[[Page 68565]]
restrict or permit as part of the proposed rule? Comments are invited
regarding any prophylactic rules that would further enhance the
integrity of the security-based swap markets.
Although much of the activity that would be prohibited by the
proposed rule is already prohibited by the general antifraud and anti-
manipulation provisions of the Federal securities laws (e.g., Exchange
Act Section 10(b) and Rule 10b-5 thereunder, and Securities Act Section
17(a)), to what extent, if any, would the proposed rule affect the
nature of the security-based swap market in general, including the
extent or nature of information shared between market participants? If
so, in what ways and to what degree?
Are there any legitimate market activities that the proposed rule
could have the effect of discouraging? Commenters are invited to
provide specific examples of any such activities and any such potential
effect.
Are there any specific issues with respect to the application of
the proposed rule to fraudulent, manipulative, or deceptive activity
involving security-based swaps (including the reference underlying of
such security-based swaps) that are or will be effected on or through
security-based swap execution facilities or national securities
exchanges, or over-the-counter? Please explain.
To what extent are transactions in security-based swaps used as a
functional or economic substitute or equivalent transaction for
transactions or practices that are otherwise prohibited by the
antifraud and anti-manipulation provisions of the Exchange Act? Should
the proposed rule impose any restrictions on such transactions?
Commenters are invited to provide specific examples.
What, if any, costs or burdens would be imposed by the proposed
rule? Would the proposed rule create any costs associated with changes
to business operations or supervisory practices or systems? How much
would the proposed rule affect compliance costs for issuers, broker-
dealers, security-based swap dealers, major security-based swap
participants, and other swap market participants (e.g., personnel or
procedural changes)? We seek comment on the costs of compliance that
may arise.
V. General Request for Comment
The Commission seeks comment generally on all aspects of proposed
Rule 9j-1. Commenters are requested to provide empirical data or
economic studies to support their views and arguments related to
proposed rule. In addition to the questions above, commenters are
welcome to offer their views on any other matter raised by the proposed
rule. With respect to any comments, we note that they are of greatest
assistance to our rulemaking initiative if accompanied by supporting
data and analysis of the issues addressed in those comments and if
accompanied by alternative suggestions to our proposal where
appropriate.
VI. Paperwork Reduction Act
Proposed Rule 9j-1 does not contain a ``collection of information''
requirement within the meaning of the Paperwork Reduction Act of
1995.\32\ An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.
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\32\ 44 U.S.C. 3501 et seq.
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VII. Consideration of Costs and Benefits
The Commission is considering the costs and benefits of proposed
Rule 9j-1. The Commission is sensitive to these costs and benefits, and
encourages commenters to discuss any additional costs or benefits
beyond those discussed here, as well as any reductions in costs. In
particular, the Commission requests comment on the potential costs for
any modification market participants' business operations or
supervisory practices or systems, as well as any potential benefits
resulting from the proposed rule for issuers, investors, broker-
dealers, security-based swap dealers, major security-based swap
participants, persons associated with a security-based swap dealer or a
major security-based swap participant, other security-based swap
industry professionals, regulators, and other market participants. The
Commission also seeks comments on the accuracy of any of the benefits
identified and also welcomes comments on any of the costs identified
here. Finally, the Commission encourages commenters to identify,
discuss, analyze, and supply relevant data, information, or statistics
regarding any such costs or benefits.
A. Benefits
Proposed Rule 9j-1 would specify that it is unlawful for any
person, directly or indirectly, in connection with the offer, purchase
or sale of any security-based swap, the exercise of any right or
performance of any obligation under a security based swap, or the
avoidance of such exercise or performance, to: (a) To employ any
device, scheme, or artifice to defraud or manipulate; (b) to knowingly
or recklessly make any untrue statement of a material fact, or to
knowingly or recklessly omit to state a material fact necessary in
order to make the statements made, in the light of the circumstances
under which they were made, not misleading; (c) to obtain money or
property by means of any untrue statement of a material fact or any
omission to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they were
made, not misleading; or (d) to engage in any act, practice, or course
of business which operates or would operate as a fraud or deceit upon
any person.\33\
---------------------------------------------------------------------------
\33\ See Proposed Rule 9j-1.
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Thus, proposed Rule 9j-1 would prohibit the same misconduct as
Exchange Act Section 10(b) and Rule 10b-5 thereunder, and Securities
Act Section 17(a) \34\ but would also explicitly reach misconduct that
is in connection with the ``exercise of any right or performance of any
obligation under'' a security-based swap. In other words, proposed Rule
9j-1 would apply to offers, purchases and sales of security-based swaps
in the same way that the general antifraud provisions apply to all
securities but would also explicitly apply to the cash flows, payments,
deliveries, and other ongoing obligations and rights that are specific
to security-based swaps. This would include, for example, misconduct
that affects the market value of the security-based swap for purposes
of posting collateral or making payments or deliveries under a
security-based swap. Thus, the proposed rule would, among other things,
prohibit a person who is a party to a security-based swap from later
engaging in fraudulent conduct (e.g., knowingly making a false or
misleading statement) that affects the value of cash flow, payments, or
deliveries, such as triggering the obligation of a counterparty to make
a large payment or to post additional collateral.
---------------------------------------------------------------------------
\34\ See supra note 5.
---------------------------------------------------------------------------
By prohibiting fraud, manipulation, and deception in connection
with the exercise of any rights or performance of any obligations under
a security-based swap, including actions taken to avoid the triggering
of such exercise or performance, the proposed rule would help to
prevent such misconduct from distorting the price and market for such
security-based swap, as well as for the reference underlying, and
improperly interfering with the independent and proper functioning of
the markets. We therefore believe that the proposed rule would benefit
market participants and
[[Page 68566]]
investors by promoting investor confidence in the integrity of the
market for security-based swaps, as well as for the reference
underlying \35\ of such security-based swaps.
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\35\ See supra note 15.
---------------------------------------------------------------------------
The proposed rule should prevent fraud, manipulation, and deception
from causing prices of security-based swaps to deviate from their
fundamental values. This would allow the Commission to guard against
misconduct that improperly interferes with the independent and proper
functioning of the markets and help to promote price efficiency, the
integrity of the price discovery process, and fair dealing between
market participants in connection with security-based swaps.
We solicit comment on any additional short-term and long-term
benefits that could be realized with the proposed rule. Specifically,
we solicit comment regarding benefits to the efficient operation of
security-based swap markets, price efficiency, market integrity, and
investor protection.
B. Costs
As an aid in evaluating costs and reductions in costs associated
with proposed Rule 9j-1, the Commission requests the public's views and
any supporting information.
By targeting misconduct that is specific to how security-based
swaps are structured and used, the proposed rule is intended to be a
measured and reasonable means to prevent fraudulent, deceptive, or
manipulative acts or practices in connection with the exercise of any
right or performance of any obligation under a security-based swap
without interfering with or otherwise inhibiting legitimate market
activity.
Because proposed Rule 9j-1 is intended to parallel the general
antifraud provisions already applicable to all securities, while also
explicitly addressing the characteristics of cash flows, payments,
deliveries, and other obligations and rights that are specific to
security-based swaps, we do not believe that the proposed rule would
impose any significant costs on persons effecting transactions or
otherwise trading in security-based swaps. As noted above, the
Commission seeks comment on whether the proposed rule could discourage
certain legitimate market activities because of concern that such
activities might be viewed as a violation of the rule.
In addition, persons effecting transactions or otherwise trading in
security-based swaps may incur costs associated with changes to
business operations or supervisory practices or systems. However, we
believe that, because most issuers, broker-dealers, security-based swap
dealers, major security-based swap participants, and other swap market
participants involved with security-based swaps are already subject to
the general antifraud and anti-manipulation provisions, much of these
practices and systems would already be in place. Thus, we believe that
any costs associated with the proposed rule for such changes (e.g.,
business or procedural changes) would be minimal.
The Commission believes that the proposed rule would not compromise
investor protection. We seek data, however, supporting any potential
costs associated with the proposed rule. In addition, we request
specific comment on any changes to business operations or supervisory
practices or systems that might be necessary to implement the proposed
rule.
VIII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
Section 3(f) of the Exchange Act \36\ requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider whether the action would promote efficiency,
competition, and capital formation. In addition, Section 23(a)(2) of
the Exchange Act \37\ requires the Commission, when making rules under
the Exchange Act, to consider the impact of such rules on competition.
Section 23(a)(2) also prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78c(f).
\37\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
Proposed Rule 9j-1 is intended to prevent fraud, manipulation, and
deception in connection with the offer, purchase or sale of any
security-based swap, the exercise of any right or performance of any
obligation under a security-based swap, or the avoidance of such
exercise or performance. Proposed Rule 9j-1 would prohibit the same
misconduct as Exchange Act Section 10(b) and Rule 10b-5 thereunder, and
Securities Act Section 17(a) \38\ but would also explicitly reach
misconduct that is in connection with the ``exercise of any right or
performance of any obligation under'' a security-based swap. In other
words, proposed Rule 9j-1 would apply to offers, purchases and sales of
security-based swaps in the same way that the general antifraud
provisions apply to all securities but would also explicitly apply to
the cash flows, payments, deliveries, and other ongoing obligations and
rights that are specific to security-based swaps.
---------------------------------------------------------------------------
\38\ See supra note 5.
---------------------------------------------------------------------------
By targeting specific misconduct that is specific to how security-
based swaps are structured and used, the proposed rule is intended to
be a measured and reasonable means to prevent misconduct that is ``in
connection with the exercise of any right or performance of any
obligation under'' a security-based swap without interfering with or
otherwise unduly inhibiting legitimate market activity. Also, because
the proposed rule would prohibit the same misconduct as Exchange Act
Section 10(b) and Rule 10b-5 thereunder, and Securities Act Section
17(a),\39\ except to explicitly reach misconduct that is ``in
connection with the exercise of any right or performance of any
obligation under'' a security-based swap, we believe that the proposed
rule would not have an adverse effect on price efficiency. If the
proposed rule mitigates fraudulent behavior, price efficiency should
improve.
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\39\ See id.
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By prohibiting fraud, manipulation, and deception in connection
with security-based swaps (including the exercise of any right or
performance of any obligation under a security-based swap or the
avoidance thereof), the proposed rule would help to prevent such
conduct from distorting the market and artificially increasing or
decreasing prices for security-based swaps. Thus, we believe the
proposed rule would help to ensure price accuracy and fairness for the
parties, which are elements of efficiency.
We also believe a rule highlighting the illegality of these
activities would focus the attention of swap market participants on
such activities and would reduce regulatory uncertainty for swap market
participants and investors and would not impose significant costs on
customers. We seek comment regarding whether proposed Rule 9j-1 may
have any adverse effects on liquidity, market operations, or risks or
costs to customers.
In addition, as discussed above, because the proposed rule would
prohibit the same misconduct as Exchange Act Section 10(b) and Rule
10b-5 thereunder, and Securities Act Section 17(a),\40\ except to
explicitly reach misconduct that is ``in connection with the exercise
of any right or performance of any obligation (or the
[[Page 68567]]
avoidance of such exercise or performance) under'' a security-based
swap, we believe that the proposed rule would have minimal impact on
the promotion of capital formation. Fraudulent and manipulative conduct
in connection with security-based swaps can undermine the confidence of
investors, not only in the market for the security-based swaps but also
in the market for the reference underlying of such security-based
swaps. For the same reasons, the proposed rule should promote capital
formation by discouraging misconduct in connection with the performance
of security-based swaps that could otherwise undermine investor
confidence or the ability of investors to make investment decisions
that are congruent to their investment objectives.
---------------------------------------------------------------------------
\40\ See id.
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Thus, we believe that the proposed rule would promote capital
formation by helping to eliminate abuses in connection with security-
based swaps. We seek specific comment and empirical data, if available,
on the potential impact of the proposed rule on capital formation,
including whether the proposed rule would promote or inhibit capital
formation, and if so, how.
In addition, the prohibitions of the proposed rule would apply
uniformly to all persons (e.g., issuers, broker-dealers, security-based
swap dealers, major security-based swap participants, and all other
swap market participants and investors) effecting transactions or
otherwise trading in security-based swaps and, therefore, should not
impose a burden on competition. Also, the proposed rule would prohibit
the same misconduct as Exchange Act 10(b) and Rule 10b-5 thereunder,
and Securities Act Section 17(a),\41\ except to explicitly reach
misconduct that is in connection with the exercise of any rights or
performance of any obligations under a security-based swap and,
therefore, the proposed rule should not impose a burden on competition.
By applying uniformly to all persons and by discouraging swap market
participants from engaging in unfair fraudulent, manipulative, and
deceptive conduct in connection with security-based swaps, we
preliminarily do not believe that the proposed rule will pose a burden
on competition and would also promote competition.
---------------------------------------------------------------------------
\41\ See id.
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We request comment on whether the proposed rule would promote
efficiency, competition, and capital formation or have an impact or
burden on competition. Commenters are requested to provide empirical
data and other factual support for their view to the extent possible.
IX. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \42\ the Commission must advise the OMB as
to whether the proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in: (1) An annual effect on the economy of $100
million or more (either in the form of an increase or a decrease); (2)
a major increase in costs or prices for consumers or individual
industries; or (3) significant adverse effect on competition,
investment or innovation. If a rule is ``major,'' its effectiveness
will generally be delayed for 60 days pending Congressional review.
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\42\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------
The Commission requests comment on the potential impact of proposed
Rule 9j-1 on the economy on an annual basis, any potential increase in
costs or prices for consumers or individual industries, and any
potential effect on competition, investment or innovation. Commenters
are requested to provide empirical data and other factual support for
their view to the extent possible.
X. Regulatory Flexibility Certification
The Regulatory Flexibility Act (``RFA'') \43\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \44\ of the Administrative Procedure
Act,\45\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \46\ Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule or proposed rule
amendment, which if adopted, would not have a significant economic
impact on a substantial number of small entities.\47\
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\43\ 5 U.S.C. 601 et seq.
\44\ 5 U.S.C. 603(a).
\45\ 5 U.S.C. 551 et seq.
\46\ Although Section 601(b) of the RFA defines the term ``small
entity,'' the statute permits agencies to formulate their own
definitions. The Commission has adopted definitions for the term
small entity for the purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See
Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR
5215 (February 4, 1982) (File No. AS-305).
\47\ See 5 U.S.C. 605(b).
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For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (i) When used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less,\48\ or (ii) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\49\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\50\ Under the
standards adopted by the Small Business Administration, small entities
in the finance and insurance industry include the following: (i) For
entities in credit intermediation and related activities, entities with
$175 million or less in assets or, for non-depository credit
intermediation and certain other activities, $7 million or less in
annual receipts; (ii) for entities in financial investments and related
activities, entities with $7 million or less in annual receipts; (iii)
for insurance carriers and entities in related activities, entities
with $7 million or less in annual receipts; and (iv) for funds, trusts,
and other financial vehicles, entities with $7 million or less in
annual receipts.\51\
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\48\ See 17 CFR 240.0-10(a).
\49\ See 17 CFR 240.17a-5(d).
\50\ See 17 CFR 240.0-10(c).
\51\ See 13 CFR 121.201 (Jan. 1, 2010).
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Based on the Commission's existing information about the security-
based swap market, the Commission preliminarily believes that the
security-based swap market, while broad in scope, is largely dominated
by entities such as those that would be covered by the ``security-based
swap dealer'' and ``major security-based swap market participant''
definitions.\52\ The Commission preliminarily believes that entities
that will qualify as security-based swap dealers and major security-
based swap market participants, whether registered broker-dealers or
not, exceed the thresholds defining ``small entities'' set out above.
Moreover, while it is possible that other parties may engage in
security-based swap transactions, the Commission
[[Page 68568]]
preliminarily does not believe that any such entities would be ``small
entities'' as defined in Exchange Act Rule 0-10.\53\ Feedback from
industry participants about the security-based swap markets indicates
that only persons or entities with assets significantly in excess of $5
million (or with annual receipts significantly in excess of $7 million)
participate in the security-based swap market. Even to the extent that
a handful of transactions did have a counterparty that was defined as a
``small entity'' under the Commission Rule 0-10, we believe it is
unlikely that proposed Rule 9j-1 would have a significant economic
impact on such entity, as the rule prohibits fraudulent and
manipulative acts, activities which are in most cases already
prohibited. Finally, because the proposed rule applies to any person,
the proposed rule applies equally to large and small entities and
therefore would not have a disproportionate impact on small entities.
Therefore, the Commission preliminarily does not believe that proposed
Rule 9j-1 will have an impact on ``small entities'' in terms of the
prohibitions included in the proposed rule.
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\52\ See supra notes 11 and 12.
\53\ See 17 CFR 240.0-10(a).
---------------------------------------------------------------------------
For the foregoing reasons, the Commission certifies that proposed
Rule 9j-1 would not have a significant economic impact on a substantial
number of small entities for purposes of the RFA. The Commission
encourages written comments regarding this certification. The
Commission requests that commenters describe the nature of any impact
on small entities and provide empirical data to support the extent of
the impact.
XI. Statutory Authority
Pursuant to Exchange Act and, particularly, Sections 2, 3(b), 9(i),
9(j), 10, 15, 15F, and 23(a) thereof, 15 U.S.C. 78b, 78c(b), 78i(i),
78i(j), 78j, 78o, 78o-8, and 78w(a), the Commission is proposing a new
antifraud rule, Rule 9j-1, to address fraud, manipulation, and
deception in connection with security-based swaps.
List of Subjects in 17 CFR Part 240
Brokers, Reporting and recordkeeping requirements, Securities.
Text of the Proposed Rule
For the reasons set forth in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 is amended by adding an
authority for Sec. 240.9j-1 to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78b, 78c, 78d, 78e, 78f, 78g,
78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78o-8, 78p, 78q,
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37,
80b-3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless
otherwise noted.
Section 240.9j-1 is also issued under sec. 943, Pub. L. No. 111-
203, 124 Stat. 1376.
2. Add Sec. 240.9j-1 to read as follows:
Sec. 240.9j-1. Prohibition against fraud, manipulation, and deception
in connection with security-based swaps.
It shall be unlawful for any person, directly or indirectly, in
connection with the offer, purchase or sale of any security-based swap,
the exercise of any right or performance of any obligation under a
security-based swap, or the avoidance of such exercise or performance,
(a) To employ any device, scheme, or artifice to defraud or
manipulate;
(b) To knowingly or recklessly make any untrue statement of a
material fact, or to knowingly or recklessly omit to state a material
fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading;
(c) To obtain money or property by means of any untrue statement of
a material fact or any omission to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which they were made, not misleading; or
(d) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person.
By the Commission.
Dated: November 3, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-28136 Filed 11-5-10; 8:45 am]
BILLING CODE 8011-01-P